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Beset by debt, Europe mulls Monetary Fund of its own

As Europe struggles with a debt crisis, the idea of a European Monetary Fund is taking hold.

(SHUTTERSTOCK)

By EMMA VANDOREPAN PYLASAssociated Press

Tues., March 9, 2010

PARIS–As Europe struggles with a debt crisis, the idea of a European Monetary Fund is taking hold.

Such a body could be a lender of last resort and keep free-spending governments from unsettling the euro – as well as global markets, the way the recent Greek debt crisis has. That's usually the role of the International Monetary Fund – but for the European Union to turn to that Washington-based body would be humiliation.

The open and urgent question: do European leaders have the backbone – whatever the working title of their new fund – to enforce tough new rules meant to safeguard the euro? And will a bailout fund just encourage more trouble?

A key lesson from the ongoing worries over whether Greece can pay its debts has been the vague EU response to the escalating difficulites of one of its members – one of the main reasons why the markets responded so negatively to the growing crisis in Greece was that no one knew what, if anything, the EU would, or could, do.

And the crisis exposed the euro's deeper vulnerability: no way to keep governments from breaking rules against running up big debts and undermining the currency.

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Sentiment toward the euro deteriorated so sharply that the very future of the single currency became a subject of open debate – and its exchange rate plunged from around $1.51 (U.S.) in December to a low of $1.3610 Monday.

Now the Europeans, or at least, the 16 countries that use the euro, appear to have grasped the nettle – they have to get their house in order, find a way to tighten budgetary discipline, and figure out how to rescue countries in trouble.

The creation of a European equivalent to the IMF could be a key pillar of a post-crisis euro zone and all the signs are that the idea is garnering support. German Finance Minister Wolfgang Schauble broached the idea on the weekend. Chancellor Angela Merkel, leader of the euro zone's biggest country, came out in favour Monday, calling it a "good and interesting idea."

The current situation suggests that "our instruments are not sufficient" to cope with such situations, Merkel told foreign journalists. She stressed that "we want to be able to resolve our problems in the future without the IMF."

Merkel said such a fund would require changing the EU's basic agreement, updated Jan. 1 with the entry into force of the Lisbon treaty streamlining decision-making. But if the EU wants to be capable of acting, "it will always run into situations in which the Lisbon treaty can't be the end of the story."

The move would insure the region against being brought low by its weakest link, something leaders failed to do in 1999 when the currency was launched. Later, they added rules limiting deficits. Countries broke them; the EU let them get away with it.

The European Commission said Monday negotiations over the creation of such a body could conclude as early as July 1, but offered no details on its powers and funding.

One powerful voice – Juergen Stark, an executive committee member of the European Central Bank – said it was a bad idea that would create a perverse incentive for countries not to clean up their balance sheets properly and thereby undermine the euro's stability.

"Every country is accountable for its public finances and thereby its debt. It would be the start for a system of financial compensation that could become very expensive, set the wrong incentives and finally be a burden for countries with solid public finances," Stark wrote in an article for German economic daily Handelsblatt.

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